Unauthorized Trading


“financial advisors must receive prior authorization
for all account transactions”

According to the Financial Industry Regulatory Authority (FINRA), unauthorized trading is considered purchasing or selling securities in a non-discretionary customer account without prior customer authorization and represents a sales practice violation. This does not apply to brokerage accounts that the financial advisor has received prior written discretionary authority from the customer to effect transactions in the account. In defense of unauthorized trading claims, financial brokerage firms frequently argue that verbal discretion was given by the customer as to price and time, or the customer ratified the transaction by not challenging the transaction on a timely basis.

In instances, when the financial advisor has received written “discretionary” authorization to make transactions on the behalf of the customer, the financial advisor cannot misuse or exceed that authority by making commissions from excessive trading or “churning”, or unsuitable investment strategies. The excessive transactions might be considered a FINRA sales practice violation as a breach of fiduciary duty to the investor that would subject the brokerage firm and its financial advisor to liability for unauthorized trading or other misconduct.

A FINRA arbitration panel may consider the following factors among others in an unauthorized trading claim:

  • Unauthorized transactions took place;
  • Financial advisor did not receive permission prior to transactions;
  • Price and time given for trading day;
  • Absence of GTC orders in account;
  • Volume of trading;
  • Similar trades in outside brokerage accounts; and
  • Net gain/loss for all trades in the security at issue.

A review of the timeline surrounding the transactions at issue is important to support a FINRA arbitration claim for damages for unauthorized trading. A review of trade confirmations in relation to the chronology of prior and subsequent communications between the customer and the financial advisor will help prove the allegations. It is also helpful to make a formal complaint with the branch office of the financial advisor immediately after the trade confirmations are received to avoid an implied ratification of the transactions at issue.

Klayman & Toskes, P.A. can help you determine whether an investment loss is the result of unauthorized trading in your brokerage account. If an investor suffers losses as a result of unauthorized trading they may be able recover their losses in a FINRA arbitration claim for damages.

Do you have a case?

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